This week saw mixed earnings releases. A clearly optimistic bias came from the infusion of the Apple numbers after the market close on Tuesday. Later in the week, however, came negative reports from UPS and Exxon Mobil. The numbers for Caterpillar were positive, but what lay beneath as the prime point of weakness was derived from China, where machinery inventories have grown too much in light of construction projects slowing and or being cancelled. 3M’s report overall was positive, with improved sales throughout Latin America, the U.S., and Canada, while business softened in Asia. Fanuc, a Japanese robotics maker, also saw its earnings in decline “due to the economic slowdown in China”. Additional credence to that effect were the slowing iron ore sales to China for BHP Billiton and declining revenues for Freeport McMoran, a supplier of large amounts of copper to China (revealing suffering from more than just the three-week closure of Grasberg). We suspect that this weakness in China (perhaps Asia in general) will have even a greater effect as we move into Q2 and Q3.
Closer to home we glossed over the abysmal durable goods orders (down 4.2%, the lowest in three years) with markets preferring to bask in the afterglow of all things Apple. (See the box scores.) Following, was the two-day Fed soiree which finished with no real surprises. The usual platitudes were conveyed. Ben indicated that the recent rise in inflation is, of course, only temporary. (Wait till the CPI rent component, which is significantly higher across the country, is factored in over the next several months. Someone at the BLS is going under the gun to “Fix” that one, as the rent component is 30% of the index! Very soon you might expect the Fed to make a case that inflation is OVERSTATED.) The word from the party is that economic growth is to “pick up gradually”, though it is modest at present. Employment expectations are improving, with a forecast of 7.8% by year-end (a number possible only if the “discouraged workers” category grows). In addition, they forecast a 0.2 percentage point increase to GDP, to at least 2.4%. With first quarter GDP figures coming in at 2.2% versus the 2.5% expected, there is still work to be done.
The Fed comments imply no immediate QE announcement, and on the day of discussion, pushed prices of equities and commodities lower – until Ben said he was “prepared to do more.” While not sure of the exact quantities of money he’ll make available, we know it will come with a healthy quantity of jaw flapping in the interim as he attempts to prop the system up with fairly dry Princeton professorial prose.
Bernanke and Geithner both enjoyed talking up the “significant risk” in Europe in contrast to the positive notes about the U.S. economy which came from the FOMC. The U.K. is double dipping into recession. Spanish debt yields are worryingly on the rise. The Italian bond auction was 60 basis points above last month’s auction, and the Dutch are witnessing political fallout from local economic stagnation: the Prime Minister resigned. We, however, disagree with Geithner and Bernanke’s U.S. comments, as not all numbers helped their case this week. As mentioned, durable goods were off; initial jobless claims missed expectations for a tenth straight week; and new home sales fell by 7.1% in March, with pending sales turning up. (Is it fair to think of a pending sale as a non-finalized transaction? Why not count it once the escrow check clears!)
On the gold front, Indian gold sales shrank from 20 tons last year during the Akshaya Tritiya holiday to 10 tons. The Indian wedding season is still likely to remain a strong one, although the new import duty is likely to make all future reported numbers fall sharply as black-market activity picks up. The official numbers are less important than the actual offtake of tonnage from the market.
The price of gold fell to within less than 1% of the 65-week moving average before finishing the week with strength. Both gold and silver are bargains. The fiscal and monetary issues hanging on the horizon make ownership compulsory for any sensible investor interested in preservation of capital. There are the fortunate few that wait for these developments and the unfortunate many that have in recent weeks been scared out of their positions – due to volatility. Such is the nature of a bull market. Some people simply don’t possess the virtues required to be successful investors: endurance, patience, fortitude, foresight, etc. To the chagrin of those fleeing, we may already be past the turning point, with the lowest prices behind us. If not, we appear close.
Approval of a gold standard in lieu of our paper system may be gaining momentum. The Missouri House moved closer to approving a gold- and silver-backed debit card program, creating a sound money policy within the state and making a statement about the concerns people have over greenbacks in the bank – a failure of confidence in the system backed by the Fed. It’s our opinion that the monetary system cannot remain as it is. A point is soon coming when the Federal Reserve System may be discredited. Perhaps a modern day Isaac Newton would confirm that the instability in our money system is due simply to the money guild shaving the edge off of coins at a rate not to exceed 2% a year.
David S. McAlvany
President and CEO